What to Do About Foreclosures, Debated
Mar 5th, 2008 by John Stodder
Michael Barr and Laura Tyson take their campaign for a New Deal-inspired plan to avert foreclosures to the Financial Times’ Economists’ Forum blog. Their plan, developed via the Center for American Progress, would have troubled mortgages auctioned off to FHA lenders, Fannie Mae and Freddie Mac, which would in turn restructure the loans so that foreclosures could be forestalled.
Aside from the personal tragedies that waves of foreclosures represent, Barr and Tyson see their plan — dubbed SAFE — as a minimal government intervention now to prevent more profound bailouts later.
Most of the refinanced loans would take the form of new fixed-rate 30-year mortgages underwritten to 80% of current home value. Backstop credit enhancements would be provided by FHA, Ginnie Mae and Treasury in return for a fee. SAFE loans would be pooled into securities and sold to private investors. Once normal conditions were restored to credit markets, the SAFE plan would automatically cease operation.
But there is nothing normal about conditions in our housing or credit markets today. That’s why we need SAFE to stem the downward spiral of foreclosures and plummeting housing prices that has undermined liquidity and confidence in global capital markets and that threatens a long, painful recession in the US and a global growth slowdown.
If the government fails to take strong action now to facilitate private sector resolution of the crisis, more aggressive government intervention will be required later. By that time, the bill for resolving the US Savings and Loan crisis of the 1980s is likely to look modest by comparison.
On the forum, FT columnist Martin Wolf and retired Fannie Mae manager Edward Dodson take issue with the proposal. From Wolf:
Is not the whole problem in the US that the government has intervened too heavily to subsidise owner-occupation, via both interest deductions from tax and government-supported, fixed-interest-rate lending? Anybody who purchases a house with debt s/he cannot service in normal times and conditions is a speculator. So the distinction the authors make between owner-occupiers and speculators is, in this case, particularly absurd.
What is really astonishing about all this is that Americans were the people who went across the world preaching the virtues of the free market - and not just preaching, imposing. And now comes a US crisis and the almost universal reaction seems to be “whatever happens, we must not let markets work their way through”. This is hypocrisy, quite apart from anything else.
Let markets clear; help make the process of clearing more efficient; preserve liquidity in financial markets; and keep aggregate demand up. This is surely what the authorities should now try to do.
I just came across this blog. I wouldn’t call it easy reading, but it is refreshing to find a discussion at this high level in which various points of view can be represented fairly rather than caricatured or omitted.
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